Providing useful insights and making the complex world of energy more accessible, from an experienced industry professional. A service of GSW Strategy Group, LLC.

Wednesday, March 25, 2009

It's the Economy

Yesterday afternoon I attended a panel discussion in the Capitol building, featuring one Senator, two Members of the House of Representatives, the new CEO of API and two senior journalists from Newsweek, which hosted the event. The discussion covered a wide array of energy topics, including offshore drilling, taxation, renewables, and climate change. Although there weren't many surprises, I was not expecting to hear such uniform skepticism on the prospects for passage this year of a cap & trade bill regulating emissions in the manner proposed by President Obama. With the exception of the Honorable Doc Hastings (R, WA), who questioned the contribution of anthropogenic CO2 to climate change, the common theme appeared to be that the dire state of the economy and the need for sensible energy policy take precedence over stronger action targeting greenhouse gas emissions. In this regard, these elected representatives are attuned to the views reflected in a new national Gallup poll. For the first time since at least the mid-1980s, a majority of Americans place a higher priority on the economy than on protecting the environment. As much as that shift might disappoint environmentalists, a sound economy is the logical precondition for building a sustainable national policy to address climate change.

All three Congressional participants on yesterday's panel were from states or districts with a vested interest in energy. If anything, I would have been more surprised if this group had indicated unwavering support for the immediate imposition of cap & trade. Senator Landrieu (D, LA) represents a state that ranks fourth in US oil production, without counting the contribution from federal waters offshore Louisiana. Representative Rahall (D, WV) chairs the House Natural Resources Committee and hails from a major coal state. And while Washington might not be top of mind as an energy state, Congressman Hastings's 4th District encompasses Columbia River hydroelectric dams, a nuclear power plant, and the DOE's Hanford nuclear site. Still, the concerns expressed by both Democrats suggest that the President cannot count on a party line vote to deliver cap & trade, if it is seen as threatening vital industries and the health of the economy as a whole.

A few weeks ago, I examined the President's proposed budget and the levels of cap & trade permit revenue it included. Since then, the non-partisan Congressional Budget Office has analyzed the budget and concluded that its estimates of the ten-year federal deficit relied on overly-optimistic assumptions of future economic growth and would likely be $2.3 trillion worse than forecast. At the same time, it appears that the original estimate of $646 billion in revenue from cap & trade was highly conservative, with likely proceeds in the range of $1.3-1.9 trillion. Those figures are certainly more in line with the level of carbon prices necessary to stimulate large emissions reduction. $12/ton of CO2 wouldn't cover even the lowest-cost estimate for carbon capture and sequestration, let alone make solar power competitive with natural gas. The roughly $35/ton consistent with $1.9 trillion in permit revenue from 2012-2019 comes much closer to the mark. However, unless the Congress goes along with the President's plan to refund most of the proceeds to taxpayers, that more realistic outcome would result in a much bigger net tax on a weaker economy than the President's staff assumed.

This creates a terrible dilemma. From the perspective of those most concerned about the risks of climate change, we are very late in putting a price on emissions of CO2 and other greenhouse gases, in order to accelerate the transition to greener energy sources and bolster the existing incentives for renewable energy and efficiency investments. Yet it is also apparent from both the Gallup poll and long experience in observing developing countries that unless the economy returns to healthy growth, the wherewithal to pay such a price--and perhaps more importantly the political will to impose it--won't be sufficient. Poor countries, or those that feel poor, are understandably reluctant to pay for environmental protection, particularly when the consequences of not paying are deferred for years or decades. Anyone questioning that logic should spend a moment revisiting Maslow's Hierarchy of Needs.

Any cap & trade bill introduced this year must take into account the dramatic changes since last year's Boxer-Lieberman-Warner bill was debated. It must be structured to minimize the impact on the struggling economy. In practical terms, that means deferring the onset of emissions caps until a recovery is confirmed to be well underway and diverting no more than the President's target of $15 billion per year for energy R&D from the refund of all proceeds to taxpayers, including the businesses that will be burdened with buying trillions of dollars worth of emissions permits. Failure to do so would jeopardize the recovery and doom cap & trade. That's crucial, because mitigating climate change won't be accomplished within the term of one President; it requires commitments that must be sustained for decades. If those commitments are pitted against the public's aspirations for prosperity, they are unlikely to be sustained long enough to do any good.